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EU Court Ruling Helps Gibraltar

by Ulrika Lomas,, Brussels

28 December 2001

The European Court of Justice has sent a strong signal that, even if the Government of Gibraltar loses its action against the EU Commission in respect of its tax-privileged regimes, companies involved will not have to repay tax foregone by Gibraltar. The EU is attacking the Exempt and Qualifying company regimes under State Aid rules, and the Gibraltar Government brought an action against the EU to stop its attack, fearing that companies may leave en masse if there is a possibility that they would have to repay tax from which they have been exempted.

Decisions of the Court announced shortly before Christmas can be interpreted to mean that the Court thinks any illegitimate State Aid to have been 'existing' rather than 'new' in nature.

The Gibraltar Government has issued a press release explaining the Court's decisions, and its reasons for optimism:

The President of the European Court of First Instance has declined to suspend the EU Commission's decisions of 11 July 2001 to investigate Gibraltar's Exempt & Qualifying Status legislation under EU State Aid Rules. The Court has, however, agreed to hear the main actions, in which annulment of these decisions is sought, under the Court's expedited hearing procedures. This means that the full hearing of the case will take place more quickly.

The Court ruled in the Government's favour on three of the four points at issue, namely,

(1) whether the Gibraltar Government had the right to bring the action itself, rather than acting through the Governor

(2) whether the Commission's decisions were challengeable in law at this early stage, that is before the Commission's investigation had been carried out; and

(3) whether the Government had made an arguable case that, even if the Gibraltar legislation could be regarded as State Aid at all, it must be deemed to constitute "existing" and not "new aid", therefore requiring the Commission to follow a different and less aggressive procedure.

The Court ruled in the Government's favour on these three important issues, but ruled against the Government on the fourth issue, namely urgency. The Court ruled that, on balance, the necessary degree of urgency did not exist to justify the Court suspending the Commission's decisions before the Court's full hearing of the main action. In making this decision the Court decided that, on a balance of interests, the urgency to the Gibraltar Economy did not outweigh the Commission's discretion to proceed under its chosen procedure. The Court came to this conclusion substantially on the basis that the prospects of an exodus of companies from Gibraltar would very likely be averted by indications from the Commission that this may not be an appropriate case to order recoverability of the State Aid (ie repayment of the tax not paid over the years).

Although the Courts decision on this point is disappointing, the reasoning is helpful on the crucial issue of recoverability of the aid. In this respect the Court has made the following statements:

(1) "The fact that the Commission took the very unusual, if not unprecedented, step in the contested decisions of inviting [the Government] to submit its observations on whether . . . it would be appropriate, in the light of the possible application of the principle of legitimate expectations, to proceed to recover the aid, might convince many companies not to leave Gibraltar."

(2) "…the relevant EC legislation provides that 'the Commission shall not require recovery of the aid if this would be a contrary to a general principle of Community law'. Accordingly, the Commission's express invitation to submit comments on the possible application in the present case of the principle of legitimate expectations must, at first sight... allay to a considerable extent any concerns which the present beneficiaries of the legislation in question may have".

The Government had taken the view that it was bound to take all possible steps to protect companies from the consequences of recoverability. The Court's reasoning provides a significant and substantial measure of help and comfort on this issue.

The Government's lawyers in Brussels have advised the Government that important parts of the Court's ruling on urgency are incompatible with established Community law, and has the effect of establishing a new states aid investigation procedure in the EU.

The Government will await a detailed legal analysis of the decision and its consequences before deciding on the next steps and any possible appeal, as well as a meeting with the Finance Centre Council to assess the industry's view about the effect of this ruling on the timing of the implementation of reforms of company taxation legislation.

Although the effect of the decision is that the Government is not legally bound to immediately suspend the existing legislation, it remains to be seen whether the Finance industry believes that the continuing uncertainty that remains, pending the hearing of the main actions and the conclusion of the Commission's investigation can be sustained and tolerated by the market. This will require an assessment of the practical effect and value of the Court's statements relating to recoverability of the aid if the Commission's investigation ultimately goes against us, and of the fact that the legislation would then have to be suspended.

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